Amazon Growth Initiatives
Hi again, I’m Viram from Vested, and today we are going to be talking about the various growth initiatives that Amazon is undertaking to scale to its next leg of growth.
As you all probably know, its core business right now is e-commerce.Amazon’s sales today are derived largely through three categories – apparel, food and household items. But all of these actually represent a very small amount of the discretionary budget that a household has.
For example, if you look at a household in the US, they have discretionary spending of about $63,000 every year. But an Amazon prime member on a yearly basis actually spends only about $1600 on Amazon and a non-prime member spends even less about $600.
Even with this less spending, Amazon actually is the market leader in e-commerce, in its largest market the US, with a market share of 20%. But this market leadership is clearly not enough for the ambitious Jeff Bezos and his trillion-dollar company!
So,to scale to the next leg of growth Amazon is undertaking two broad initiatives:
The first is on-boarding 3rd party merchants onto their e-commerce platform.
So when Amazon started off, they started as a first-party, what that meant was that Amazon would buy products from brand or merchants as a wholesaler and then sell them on their online website. They would have total pricing authority over those products.
For example, if you’re going to buy like a Levis T-shirt right now from Amazon, it’s likely that Amazon has purchased a bulk of those t-shirts as a wholesaler and is selling them on its platform.
But over time what Amazon started to do was that they started to onboard third-party merchants. So basically, a third-party merchant would come on Amazon and access and it as a platform to reach customers, and Amazon in turn would charge them a fee for every sale they make. So the next time you go to Amazon and on a product page you see that it’s sold by an XYZ merchant, it means that you’re buying something underAmazon’s 3rd party model.
Over time this model, the 3rd party model has actually kept increasing in percentage contribution. So in 2019, 60% of the sales that happen on Amazon, happen through the 3rd party model.
The second approach that Amazon is taking is expanding into difficult-to-penetrate fields, such as healthcare, groceries, and entertainment.
So first let’s look at what they are doing in healthcare. Healthcare and insurance represent the 3rd largest spend in any household’s discretionary budget.
So Amazon has divided it into three simple buckets
The first is getting access to doctors, But remotely. So here it started its telehealth platform called – Amazon Care where you can get video consultation, prescription delivery and its chat service. Because of the limitations in video and chat consultations, Amazon has also launched its wearables called Halo, which competes with Fitbit and Apple watch.
Privacy concern aside – Halo has this feature that allows you to measure body fat by applying a machine learning algorithm and asking you to wear tight-fitting clothes. So weird.
The second initiative is getting access to medication and prescriptions. And here Amazon bought PillPack for an astounding US $753 million.
And lastly, Amazon allows you to pay for the above too mostly with its insurance initiatives.
Next up, let’s look at groceries! So there are two methods in which one can get groceries delivered. The first is if you have an existing grocery store, you get it delivered through a 3rdplatform. So there’s Instacart in the US, there’s Swiggy in India.
But this method has traditionally proved very unprofitable. it can only be profitable if you have a good number of orders per delivery run.
So, here’s what Amazon did. It basically built on top of its existing network. What that meant is that the existing deliveries that were delivering e-commerce goods, they added groceries to it, which made it much more economical for them to launch a grocery service.
But the issue that they ran into is that they didn’t have an inventory system that is capable of handling groceries which are perishable items and this is where the Whole Foods acquisition for Amazon comes in.
They bought Whole Foods at US $13.7 billion and got access to their inventory and distribution systems.
Now lastly let’s look at what Amazon is doing in the entertainment industry.
Here Amazon has divided its initiatives into audio and video. Let’s look at audio first.
In audio, Amazon first bought audible, an audiobook company that allowed it to provide audiobooks to its customers.It also launched prime music with unlimited music streaming, competing with the likes of Apple Music and Spotify.
The goal here is not to drive profits but it is to get people to spend more and more time on Amazon, and the more time you spend on Amazon the more likely that you become a prime customer and the more likely that you actually shop from its core offering which is e-commerce.
This strategy is what defined Amazon’s foray into video as well.
As an example, let’s look at Amazon’s Man in the High Castle original TV show. It cost Amazon $73 million to produce that show, but in return, it actually got them 1.15 million new Prime subscribers. So that year is almost an acquisition cost of about US $63 per Prime member. But in return, every prime member pays US $99 which means that in eight months Amazon’s video initiative actually helped them break even on getting Prime customers.
Lastly, even in video Amazon is doing what it did with its 3rd party merchants in e-commerce. It basically is using its platform, giving it to other 3rd party streaming services such as HBO and CBS and allowing them to access customers for a fee.
In 2020 it is reported that Amazon made $3.6 Billion just from providing access to these 3rd party streaming services.
All that being said, it is still not enough for what’s in store at Amazon.